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International Arbitration News, Trends and CasesSat, 04 Nov 2017 00:06:12 +0000en-UShourly1https://wordpress.org/?v=4.7.8HLArbitrationLawhttps://feedburner.google.comArbitration: a new forum for business and human rights disputes?https://www.hlarbitrationlaw.com/2017/10/arbitration-a-new-forum-for-business-and-human-rights-disputes/
https://www.hlarbitrationlaw.com/2017/10/arbitration-a-new-forum-for-business-and-human-rights-disputes/#respondTue, 17 Oct 2017 10:36:53 +0000http://www.hlarbitrationlaw.com/?p=1743This blog post was first published on the Practical Law Arbitration Blog.

On 27-29 November 2017, the United Nations Forum on Business and Human Rights will convene in Geneva. Its central theme: Access to Effective Remedy. In line with this shifting focus by the international community on the third pillar of the UN Guiding Principles on Business and Human Rights (UNGPs), a working group of international law specialists published a proposal to use arbitration to resolve disputes that arise out of human rights abuses involving businesses (BHR disputes).

The proposal is not intended to replace any existing means of redress. Rather, the intention is to offer a potentially more effective alternative.

According to the working group, international arbitration “holds great promise” as a method of resolving BHR disputes, which often occur in regions where national courts are “dysfunctional, corrupt, politically influenced or simply unqualified”. Indeed, arbitration offers many advantages:

A neutral forum, whereas domestic or international courts may face political pressure.

Impartial judges with expertise in human rights, and who are selected by the parties.

Procedural flexibility.

Greater efficiency (compared with many domestic court systems).

Universal recognition (the New York Convention provides for the recognition and enforcement of arbitral awards; it is subject only to limited grounds for refusal and applies in 157 countries).

Commentators from the human rights and arbitration communities have reacted to this innovative proposal with a number of questions, including:

How would businesses and victims of human rights violations submit to arbitration in practice for disputes not arising out of an existing contract containing an agreement to arbitrate? There would need to be a voluntary submission to the arbitral process after the harm or event in question has occurred. This may be difficult to achieve in practice. One option suggested by the working group is that commercial contracts could specifically identify as “third party beneficiaries” classes of victims that could initiate or participate in future arbitrations.

What norms or laws would be applied by the arbitral tribunal? According to the working group, the applicable norms or laws could be incorporated by reference in the contract or agreement to arbitrate. However, what would those applicable norms or laws be? Do they recognise corporate liability for human rights violations? Indeed, the question of whether corporations can be liable for violations of human rights under international or domestic law remains an open one in many jurisdictions (see, for example, Kiobel v Shelland Jesner v Arab Bank in the US). As for the possibility of incorporating the UNGPs or other voluntary principles, what are the implications of making obligations contractual and enforcing obligations that were only ever intended to be soft law?

Is a private forum like arbitration appropriate for resolving human rights disputes? The importance of ensuring transparency in human rights cases is potentially inconsistent with the confidentiality that is usually associated with arbitration. Some also argue that, as a matter of public policy, human rights should remain the prerogative of national courts. Those in favour of the proposal highlight the greater neutrality and impartiality offered by arbitration, which may be welcome in politically or emotionally charged disputes. It may also be possible to modify the arbitration process to make it more transparent and public for BHR disputes (in the same way that such transparency is increasingly a feature of investment treaty arbitration). Of course, the affected parties would need to consent to arbitrate the dispute in the first place.

How would victims of human rights violations afford the cost of arbitration? The working group’s response to this “inequality of arms” concern is that funding and support could be found for arbitration proceedings in the same way as it is currently found for domestic litigation. Alternatively, dedicated funds for the arbitration of BHR disputes could be established; similar perhaps to the Permanent Court of Arbitration’s Financial Assistance Fund, which helps developing countries meet their costs in investor-state arbitrations.

What recourse would a defendant business have to dismiss unfounded claims? It is true that, compared with the mechanisms available in domestic courts, arbitration offers limited options for summary dismissal of spurious claims. However, addressing this perceived shortcoming could be considered in the context of adapting the arbitration process for BHR disputes.

The working group acknowledges that existing procedural arbitration rules are inadequate for dealing with BHR disputes, and that tailored arbitration rules should be developed. These should take into account the need for greater transparency, how to accommodate multiple victims and protect vulnerable victims, and whether awards should be subject to appeal. The working group is in the process of convening a drafting committee for this purpose.

Although this initiative still has some way to go before it could work in practice, the implementation of the UNGPs by corporations is leading to an increased incidence of “BHR clauses” in commercial contracts (imposing human rights compliance obligations on business counterparties, for example, suppliers). As a result, arbitral tribunals may, in any event, find themselves determining business-to-business BHR disputes before too long.

The TNB Case clarifies the position that any assertion of Crown immunity must come from the Crown; in this case by the Central People’s Government (“CPG“). SOEs will unlikely be granted Crown immunity, entitlement to which will be assessed by the degree of control asserted on an SOE by the CPG.

The TNB Case suggests that an SOE with mainly commercial activities will unlikely be able to invoke Crown immunity.

Crown immunity

Crown immunity refers to a doctrine that the Crown enjoys immunity from being sued in its own courts. Such immunity was previously enjoyed by the British Crown and was transferred to the CPG when Hong Kong returned to China in 1997.

In the TNB Case, China National Coal Group Corporation (“Respondent“) was an SOE. It tried to invoke Crown immunity to resist the enforcement of an arbitration award against its assets in Hong Kong. It claimed to be an entity under full control of the State-Owned Assets Supervision and Administration Commission (“SASAC”), which acted on behalf of the CPG.

The CFI rejected the Respondent’s argument based on two grounds:

The Respondent failed to show that it had authority to assert Crown immunity on behalf of the CPG, and that no such claim had been validly made on behalf of the CPG; and

The CFI found as a matter of fact that under PRC law, the Respondent was neither a part of the CPG, nor SASAC. In this regard, the Respondent failed to satisfy the “control test”.

Assertion of Crown immunity

Any assertion of Crown immunity must come from the Crown, in this case, the CPG as the highest executive body as defined in Articles 85 and 86 of the Chinese Constitution.

In The Hua Tian Long (No.2) [2010] 3 HKLRD 611 (“HTL Case”), Justice Stone (as he then was) advocated the adoption of a certification procedure; it was unsatisfactory for the court to referee a dispute on Crown immunity based on adversarial expert evidence.

In this case, there was no assertion made by the Respondent that it was authorised by SASAC or the CPG, or any other authority than the Respondent itself, to make the claim of Crown immunity.

The CFI highlighted that even in the HTL Case, the evidence from the manager of the defendants was that he was authorized and instructed by the Ministry of Communications, Guangzhou Salvage Bureau of the CPG, and not just by the defendants, to support the defendants’ entitlement to Crown immunity.

In rejecting the Respondent’s assertion of Crown immunity, the CFI placed great weight on a letter issued by the Hong Kong and Macao Affairs Office of the State Council (“HK Office“), which is an administrative office under the State Council, which, under the PRC Constitution, is the highest organ of state power and administration.

The letter stated that the Respondent is an independent legal entity carrying out activities of production and operation on its own, with no special status or interests superior to any other enterprises. As a SOE, the Respondent was not considered as a part of the CPG, nor was it deemed as performing functions on behalf of the CPG, when the Respondent carried out commercial activities.

Control test

In the TNB Case, the CFI applied the “control test” to determine the degree of control asserted by the CPG on the Respondent. The CFI listed relevant factors which have been considered by the courts in applying the control test:

independent discretion enjoyed by the entity;

control exercised by the Crown as investor;

the separate legal personality of the entity;

the power of the Crown to appoint and remove senior officers of the entity; and

the financial autonomy of the entity.

The CFI ruled that the Respondent had full autonomy and extensive independence in making decisions regarding its business, financial and management matters. For example, the board had powers and authority under the Articles (approved by SASAC) to determine its own investment plans, approve its annual financial budget, exercise management rights and appoint or dismiss its management team. It functioned just like other business enterprises and did not require approval from the SASAC or CPG in carrying out its daily activities or operations. The CFI stated it was significant that the Respondent had the right under the Assets Law to possess, use, profit from and dispose of its property. Although the Respondent was wholly owned by SASAC, SASAC only acted like a normal controlling shareholder of any company. Therefore, the Respondent was an independent legal entity separated from the CPG.

Distinguished from The Hua Tian Long (No.2)

The HTL Casewas the first case that addressed the issue on “Crown immunity”. In that case, the CFI granted Crown immunity to a public institution after applying the “control test”.

Nevertheless, the TBN Case can be distinguished from the HTL Case. In the latter case, the public institution had no shareholder and no paid up capital. It had no right to use or dispose its assets. Therefore, the CFI decided that the public institution formed part of the Ministry of Communications. This decision is consistent with the TBN Case.

Key points

Crown immunity remains available to PRC public institutions in respect of suits, enforcement, and the execution of assets before the Hong Kong courts.

The entity relying on the Crown immunity claim has to satisfy the “control test”, which will be determined by the Hong Kong courts on a case-by-case basis.

An SOE will unlikely enjoy Crown immunity as it is not a part of the CPG in the execution of any government function.

SOEs with mainly commercial business will unlikely be able to invoke Crown immunity if they enjoy a high degree of independence and autonomy in the overall decision making process.

If a Chinese entity intends to assert Crown immunity, it should seek endorsement from the CPG beforehand.

For companies that want to do business with a PRC entity, they should consider the following measures:

a. Identify whether the entity is an SOE or a public institution. If it is the former, it is unlikely that an SOE will enjoy Crown immunity. If it is the latter, Crown immunity will more likely be available;

b. Identify the main activities conducted by the entity. Is it mainly commercial or governmental?

c. Regardless what the answer is, waivers of the right to claim Crown immunity should be sought from the entity. However, it has not been tested whether such pre-contractual waivers are enforceable against entities that enjoy Crown immunity in Hong Kong.

Conclusion

The TNB Case suggests that Crown immunity will unlikely be available to PRC state-owned entities. Hence, they can be sued in the Hong Kong courts, and enforcement and execution can be made against their assets. This decision should provide comfort to international investors doing business with Chinese SOEs.

The position may, however, be different with regards to SOEs in foreign states, central banks, and sovereign wealth funds, which may be able to claim state immunity in the Hong Kong courts if they are deemed to be part of the ‘state’ or a state organ. How a Hong Kong court would decide whether a foreign SOE, central bank and sovereign wealth fund is a state entity is, however, untested.

This is another arbitration friendly decision by the Hong Kong courts confirming the enforcement of an arbitral award by way of charging order. Awards have consistently been enforced against Chinese SOEs by the Hong Kong courts. For example, Hogan Lovells acted for Shandong Hongri Acron Chemical, a subsidiary of a Russian entity, in the enforcement of a CIETAC award against Petrochina International (HK) Corporation, a subsidiary of a large Chinese SOE: Shandong Hongri Acron Chemical. Joint Stock Co v. PetroChina International (HK) Corp [2011] HKCA 168.

The consistent enforcement of arbitral awards against Chinese SOEs by the Hong Kong courts aligns with a recent survey on Judicial Independence released by the World Economic Forum for 2016-2017. Hong Kong is ranked 8th overall but 1st in Asia, ahead of other arbitration friendly jurisdictions such as London (the U.K. is ranked 9th) and Singapore (ranked 23rd).

]]>https://www.hlarbitrationlaw.com/2017/09/hong-kong-court-refuses-to-grant-crown-immunity-to-prc-state-owned-enterprise/feed/0PRC Court refuses to enforce SIAC arbitral award made by one arbitrator under expedited arbitration procedures when arbitration agreement provided for three arbitratorshttps://www.hlarbitrationlaw.com/2017/09/prc-court-refuses-to-enforce-siac-arbitral-award-made-by-one-arbitrator-under-expedited-arbitration-procedures-when-arbitration-agreement-provided-for-three-arbitrators/
https://www.hlarbitrationlaw.com/2017/09/prc-court-refuses-to-enforce-siac-arbitral-award-made-by-one-arbitrator-under-expedited-arbitration-procedures-when-arbitration-agreement-provided-for-three-arbitrators/#respondFri, 01 Sep 2017 12:00:10 +0000http://www.hlarbitrationlaw.com/?p=1739In Noble Resources International Pte. Ltd v. Shanghai Good Credit International Trade Co., Ltd. (2016) Hu 01 Xie Wai Ren No. 1, the Shanghai No.1 Intermediate People’s Court in a judgment dated 11 August 2017 refused recognition and enforcement of a Singapore International Arbitration Centre (“SIAC“) arbitral award under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (“New York Convention“) on the basis that the composition of the arbitral tribunal and/or the arbitral procedure was not in accordance with the agreement of the parties.

The case arose out of the recently replaced SIAC 2013 arbitration rules (“SIAC Rules“). Article 5 of the SIAC Rules provided for the expedited procedure:

5.1 Prior to the full constitution of the Tribunal, a party may apply to the Registrar in writing for the arbitral proceedings to be conducted in accordance with the Expedited Procedure under this Rule where any of the following criteria is satisfied:

a. the amount in dispute does not exceed the equivalent amount of S$5,000,000, representing the aggregate of the claim, counterclaim and any set-off defence;

b. the parties so agree; or

c. in cases of exceptional urgency

5.2 When a party has applied to the Registrar under Rule 5.1, and when the President determines, after considering the views of the parties, that the arbitral proceedings shall be conducted in accordance with the Expedited Procedure, the following procedure shall apply:

a. The Registrar may shorten any time limits under these Rules;

b. The case shall be referred to a sole arbitrator, unless the President determines otherwise;

c. Unless the parties agree that the dispute shall be decided on the basis of documentary evidence only, the Tribunal shall hold a hearing for the examination of all witnesses and expert witnesses as well as for any argument;

d. The award shall be made within six months from the date when the Tribunal is constituted unless, in exceptional circumstances, the Registrar extends the time; and

e. The Tribunal shall state the reasons upon which the award is based in summary form, unless the parties have agreed that no reasons are to be given.

Under Article 5.1 of the SIAC Rules, a party may apply to the Registrar of SIAC for the arbitral proceedings to be conducted in accordance with the expedited procedure. If the expedited procedure applies, the arbitration is to be referred to a sole arbitrator, unless the President of SIAC determines otherwise. The Iron Ore Sale & Purchase Agreement dated 29 October 2014 (“Contract“) between Noble Resources International Pte Ltd of Singapore (“Claimant“) and Shanghai Good Credit International Trade Co., Ltd. of China (“Respondent“) incorporated a Standard Iron Ore Trading Agreement (“Standard Agreement“). Article 16 of the Standard Agreement contained the arbitration agreement and Article 16.1.1 provides for three arbitrators.

The dispute was in respect of the sale and purchase of iron ore. The Respondent failed to issue a letter of credit to the Claimant to pay for the goods as required under the Contract, and it was ultimately terminated. On 14 January 2015, the Claimant served a Notice of Arbitration and applied to SIAC for the proceedings to be conducted under the expedited procedure on the basis of the amount in dispute being under S$5 million. SIAC accepted the application for the arbitration to be conducted pursuant to the expedited procedure on 17 February 2015. On 20 April 2015, SIAC appointed a sole arbitrator for the case. On 16 July 2015, a hearing was conducted before the sole arbitrator. The Respondent objected to the expedited procedure and the appointment of a sole arbitrator but did not otherwise participate in the arbitration and the Final Award was made in their absence. The Final Award was issued on 26 August 2015. The sole arbitrator awarded the sum of US$1,603,100 to the Claimant representing damages for breach of contract.

When it came to recognition and enforcement of the arbitral award in Mainland China, the Respondent challenged enforcement under the New York Convention and Article 283 of the Civil Procedure Law of the PRC, based on a number of grounds.

One ground was the composition of the tribunal was not in accordance with the agreement of the parties as stipulated in the arbitration clause, as under the Contract it was expressly stated that the tribunal would comprise of three arbitrators, but in this case only a sole arbitrator was appointed. The Respondent had not accepted the composition of the tribunal and it had strongly opposed the appointment of a sole arbitrator, objecting on multiple occasions. Accordingly, the composition of the arbitral tribunal and/or the arbitral procedure was not in accordance with the agreement of the parties.

The Court’s reason for refusal of recognition and enforcement was Article V(1)(d) of the New York Convention – the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties.

First, the arbitration agreement in the Contract provided for three arbitrators. Accordingly, the arbitral proceedings and composition of the tribunal should have complied with the arbitration agreement.

Second, the adoption of the expedited procedure in this case was in line with Article 5.1 of the SIAC Rules as the disputed amount did not exceed S$5 million. Accordingly, the Court was of the view that the adoption of the expedited procedure by SIAC was not contrary to the agreement of the parties.

Third, regarding the composition of the tribunal, the Court commented that the 2013 SIAC Rules neither excluded the adoption of an alternative composition of the tribunal in proceedings conducted under the expedited procedure, nor does it specify that the President of SIAC can have the right to invoke Article 5.2(b) regarding the appointment of a sole arbitrator when the parties have agreed on the composition of the tribunal. Article 5.2(b) of the SIAC Rules stating “the case shall be referred to a sole arbitrator, unless the President determines otherwise” should not be interpreted that the President of SIAC having absolute discretion on the composition of the tribunal; on the contrary, when exercising its discretion, the President must give full consideration to the parties’ agreement with respect to the composition of the tribunal in order to preserve party autonomy.

Since the parties had already expressly agreed in the arbitration agreement that the tribunal shall comprise of three arbitrators and did not exclude this composition of the tribunal in the expedited procedure, the adoption of the expedited procedure should have been referred to a three member tribunal. The Court considered that use of the expedited procedure should not prevent the parties from exercising their fundamental rights to an arbitration comprised of three arbitrators as stipulated in the arbitration agreement. In this case, the Court considered appointment of a sole arbitrator in accordance with Article 5.2 of the SIAC Rules was a breach of the arbitration agreement when the arbitration agreement had provided for three arbitrators and the Respondent had expressed its strong opposition against the appointment of a sole arbitrator. Accordingly, this fell within Article V(1)(d) of the New York Convention and the award should not be recognized and enforced.

Comments

Users of arbitration want efficiency and economy in the arbitral process. The availability of expedited procedures providing for arbitrations conducted under shortened time limits and an award to be rendered within six months from the date when the institution transmits the file to the tribunal is commonplace under the leading institutional arbitral rules and reflects international best practice. The SIAC and HKIAC have had 207 and 20 arbitrations conducted under their expedited procedures respectively, and client feedback has been very positive.

In the 2015 International Arbitration Survey “Improvements and Innovations in International Arbitration” conducted by Queen Mary University of London, 92% of respondents favoured the inclusion of simplified procedures in institutional rules for claims under a certain value. 33% of respondents would have this as a mandatory feature and 59% as an optional feature.

However, the effectiveness of expedited procedures depends ultimately on the enforcement of an award rendered from such procedures.

The PRC courts have a good track record of enforcement and their concern in this case is not with the expedited procedures themselves. Although the PRC courts are becoming more arbitration friendly and have upheld arbitration agreements providing for ICC arbitration in Shanghai and Beijing, and the validity of a “hybrid” arbitration clause providing for arbitration at CIETAC under the UNCITRAL Arbitration Rules proceedings, the Shanghai Intermediate People’s Court in this case upheld the parties’ agreement in their arbitration clause to have a three member tribunal. Where the decision is significant is that it treated the stipulation of three arbitrators as paramount, and did not read the expedited procedural provisions of the former version of the SIAC Rules as allowing SIAC to appoint a sole arbitrator when the arbitration agreement required three.

PRC courts have also upheld the parties’ agreement on the arbitration procedure in other enforcement cases. For example, in Alstom Technology Ltd. v. Insigma Technology Co. Ltd., the Hangzhou Intermediate People’s Court refused to enforce a SIAC award on the ground that the constitution of the tribunal, with reference to the SIAC rules, was not in accordance with the parties’ agreement that SIAC administer the ICC Rules in the arbitration clause. The refusal of enforcement was upheld by the Supreme People’s Court.

It is significant that this case is based on the 2013 version of the SIAC Rules. In 2016, SIAC published an updated version of its rules to put this issue beyond doubt. In respect of the expedited procedure, Article 5.3 now states that “[b]y agreeing to arbitration under these Rules, the parties agree that, where arbitral proceedings are conducted in accordance with the Expedited Procedure under this Rule 5, the rules and procedures set forth in Rule 5.2 shall apply even in cases where the arbitration agreement contains contrary terms.” The PRC Court would have come to a different conclusion under the revised 2016 SIAC Rules.

The inclusion of the above provision in the 2016 SIAC Rules was partly due to the decision of AQZ v. ARA [2015] SGHC 49 in which the Singapore High Court considered a setting aside application to an award made under the expedited procedure of the SIAC Rules. In that case, the parties had entered into an agreement in 2009 regarding the sale and purchase of Indonesian non-coking coal. Arbitration was commenced by the buyer in 2013, and SIAC proceeded with the appointment of a sole arbitrator under the expedited procedure, with the seller reserving its rights of challenge. In the Singapore setting aside proceedings, the seller argued that the rules in force at the time of the parties’ contract were the 2007 SIAC Rules (which had no expedited procedure), and therefore the conduct of the arbitration under the expedited procedure of the 2010 SIAC Rules was not in accordance with the parties’ agreement. The seller also argued that the parties had expressly agreed to arbitration before three arbitrators, and that therefore the conduct of the expedited arbitration before a sole arbitrator was not in accordance with the parties’ agreement. However, the Singapore High Court rejected the challenges to both the applicability of the expedited procedure and the appointment of a sole arbitrator, and placed emphasis on SIAC’s role in arbitrator appointments under the SIAC Rules.

Institutions have taken different approaches to the composition of the tribunal when applying their expedited procedures. For example, the ICC amended its rules in March 2017 to provide for an expedited procedure. Adopting a similar approach to SIAC, Article 30(1) states that “[b]y agreeing to arbitration under the Rules, the parties agree that this Article 30 and the Expedited Procedure Rules set forth in Appendix VI (collectively the “Expedited Procedure Provisions”) shall take precedence over any contrary terms of the arbitration agreement.”

In drafting the arbitration clause, for parties who want three arbitrators to decide their disputes under the expedited procedures of the ICC and SIAC arbitration rules, they are advised to stipulate this in their arbitration clause.

The Hong Kong International Arbitration Centre (“HKIAC“) has taken a different approach. Article 41.2 of the HKIAC’s Administered Arbitration Rules (“HKIAC Rules“) provides that “[w]hen HKIAC, after considering the views of the parties, grants an application made pursuant to Article 41.1 [the Expedited Procedure], the arbitral proceedings shall be conducted in accordance with an Expedited Procedure based upon the foregoing provisions of these Rules, subject to the following changes:

a. the case shall be referred to a sole arbitrator, unless the arbitration agreement provides for three arbitrators;

b. if the arbitration agreement provides for three arbitrators, HKIAC shall invite the parties to agree to refer the case to a sole arbitrator. If the parties do not agree, the case shall be referred to three arbitrators;“

In this regard, the HKIAC rules preserve party autonomy, and the quantum of a dispute does not necessarily correlate with its complexity.

This case is potentially significant for claimants with arbitration agreements stipulating three arbitrators who are considering using the expedited procedures under two older versions (2010 and 2013) of the SIAC rules. If they intend to enforce the award in the PRC, they can still enjoy the benefits of expedited arbitration but should ask for three arbitrators to be appointed. The 2016 SIAC rules address this situation. It is interesting in this case that the Claimant had indicated that it was prepared to agree to a tribunal consisting of three arbitrators subject to the Respondent indicating that it would pay the costs of a three member tribunal. Since this did not happen, and there was no agreement on a three member tribunal, SIAC appointed a sole arbitrator.

In the PRC, if the Intermediate People’s Court refuses recognition and enforcement of a foreign arbitral award (including a Hong Kong award), it must submit the case to the Provincial Higher People’s Court for review before issuing its ruling. If the Higher People’s Court agrees with the ruling, it must report to the Supreme People’s Court. A ruling refusing recognition and enforcement of a foreign arbitral award can only be issued after the Supreme People’s Court makes a formal reply.

We understand that the Shanghai Intermediate People’s Court referred the matter to the Supreme People’s Court before issuing the judgment. Therefore, the judgment already reflects the Supreme People’s Court’s position.

]]>https://www.hlarbitrationlaw.com/2017/09/prc-court-refuses-to-enforce-siac-arbitral-award-made-by-one-arbitrator-under-expedited-arbitration-procedures-when-arbitration-agreement-provided-for-three-arbitrators/feed/0Will life sciences provide a growth injection for international arbitration?https://www.hlarbitrationlaw.com/2017/08/will-life-sciences-provide-a-growth-injection-for-international-arbitration/
https://www.hlarbitrationlaw.com/2017/08/will-life-sciences-provide-a-growth-injection-for-international-arbitration/#respondTue, 29 Aug 2017 13:51:03 +0000http://www.hlarbitrationlaw.com/?p=1736This blog post was first published on the Practical Law Arbitration blog.

The use of international arbitration has expanded over the years to encompass a wide array of sectors. For example, while the majority of financial services disputes still end up in court, many of them are submitted to arbitration. Of the London Court of International Arbitration’s (LCIA’s) caseload in 2016, 20% comprised of such disputes. This was more than either construction or shipping.

This raises the question of which other industry sectors might provide a larger number of arbitrations in the future. One possibility is life sciences.

This industry sector is already the joint fifth biggest contributor to the LCIA’s caseload. It comprises 15% of arbitrations and mediations sent to the World Intellectual Property Organization (WIPO), and various institutions (including the International Chamber of Commerce (ICC) and American Arbitration Association (AAA)) have seen steady growth in the number of life sciences disputes referred to them. There are also reasons to suggest that the number of life sciences arbitrations may increase.

The life sciences industry has a global reach

The life sciences sector is a truly global industry. Life sciences giants frequently expand out of their home markets in search of better growth opportunities in emerging markets. Many of those emerging markets already have their own life sciences companies with significant annual revenues. For example, Mexico, India, Indonesia and South Africa all have pharmaceutical companies with turnover close to US $1 billion.

In addition, the complex supply and distribution chains employed by many life sciences companies often span multiple jurisdictions, as do the joint venture and licensing arrangements that many of these companies utilise.

Arbitration is well-suited for the resolution of disputes arising out of these types of complex, multi-jurisdiction arrangements, particularly given:

The neutrality resulting from neither party submitting to the “home” courts of the other party.

That any resulting arbitral award will be enforceable in any of the 157 countries that are signatories to the New York Convention.

The life sciences industry is growing

The life sciences industry has grown considerably in recent years (and is expected to continue growing). A consideration of some of the factors behind that growth suggests that more growth will likely result in the need to resolve a greater number of disputes.

Considerable growth for many companies has also been achieved through the significant consolidation that has occurred in the market in recent years. For example, in 2015, 236 mergers and acquisitions between pharmaceutical companies were closed worldwide, for a total value of over US $403 billion combined. Not only is this a good indicator of the potential future growth of the sector, it may also lead to further disputes. Again, the complex cross-border nature of many of these mergers and acquisitions is an indication that arbitration is likely to be used as a dispute resolution mechanism.

Further growth potential for the industry lies in the proliferation of newer, innovative companies specialising in biotech and medical devices. As these companies seek to compete or seek synergies with more established players, disputes may arise. Many of these disputes will be well suited to arbitration if the commercial arrangements are multi-jurisdictional or confidential.

Arbitration has other benefits for life sciences companies

There are significant additional benefits to arbitration for life sciences companies which, as they become more widely known, may result in those companies choosing arbitration for the resolution of certain disputes.

One such benefit is the confidentiality of arbitration. In particular, this provides a further level of protection for companies concerned about intellectual property or trade secrets being released in the public domain. For companies whose value can rest on the strength and exclusivity of their intellectual property, this is not an advantage to be overlooked. It has been recognised in certain instances already; for example, in Portugal, specific legislation (Decree Law 62/2011) has been enacted, mandating arbitration for intellectual property disputes in the pharmaceutical sector.

A further advantage is the ability for the parties to appoint arbitrators with the specialised skills required to resolve life sciences disputes. There is an increased trend of arbitration clauses in life sciences agreements requiring arbitrators to have certain qualifications or experience. A number of arbitral institutions (such as the International Centre for Dispute Resolution (ICDR)/AAA) now have panels of arbitrators with specific life sciences experience.

Scope for related disputes

In recent years there have been several investment treaty arbitrations relating to life sciences companies. This is in addition to litigation within the EU which considers the impact of EU competition law on arbitral awards involving life sciences companies. This is not surprising given that the sector is heavily regulated.

In conclusion, life sciences disputes already form a significant number of arbitration disputes and the number of arbitrations in the sector looks set to grow. In particular, while litigation will doubtless remain a mainstay for the resolution of life sciences disputes, the combination of the growth and increasing globalisation of the industry, with the benefits that arbitration offers for the resolution of complex multi-jurisdictional disputes, suggests that there are likely to be more life sciences arbitrations too.

]]>https://www.hlarbitrationlaw.com/2017/08/will-life-sciences-provide-a-growth-injection-for-international-arbitration/feed/0CPR Appoints New Cyber Panel Ahead of Anticipated Increase in Data Security Disputeshttps://www.hlarbitrationlaw.com/2017/08/cpr-appoints-new-cyber-panel-ahead-of-anticipated-increase-in-data-security-disputes/
https://www.hlarbitrationlaw.com/2017/08/cpr-appoints-new-cyber-panel-ahead-of-anticipated-increase-in-data-security-disputes/#respondWed, 16 Aug 2017 15:56:32 +0000http://www.hlarbitrationlaw.com/?p=1734The International Institute for Conflict Prevention and Resolution, a New York-based organisation offering Alternative Dispute Resolution (ADR) services, has recently announced the launch of a new specialised panel of neutrals, commissioned to deal with cybersecurity disputes. The Cyber Panel is composed of experts in cyber-related areas such as data breaches and subsequent insurance claims. In a press release, Noah Hanft, President of CPR, described the new panel as guiding the “critical effort” by businesses to “prevent and/or resolve cyber-related disputes in a manner that best protects operations, customers and reputation” due to attacks now occurring with increased frequency and sophistication.

CPR’s decision to establish a specialist cyber panel addresses a perceived need for arbitrators and mediators with relevant expertise, given that data protection and security breaches are regarded as an increasingly common cause of technology, media, and telecommunications (TMT) disputes, and therefore a significant growth area for commercial dispute resolution. According to the 2016 International Dispute Resolution survey on TMT disputes conducted by the School of International Arbitration at Queen Mary University of London, respondents predicted a 191% increase in disputes related to data/system security breaches, the largest growth area identified by the survey. Despite the fact that only 9% of respondents had encountered such disputes over the last five years, 79% of respondents thought that they were either likely or very likely to arise over the next five years. The survey also suggested that data breaches are most often caused by employee action, followed by malicious third party attacks, with both being more common than breaches caused by system failures.

Given the significant reputational and financial damage that can result from a data security breach, it is crucial to resolve subsequent disputes through the use of a reliable procedure which is tailored to the wider commercial context. This is why TMT companies are increasingly often turning to international arbitration which, as the survey shows, was respondents’ preferred mechanism for resolving disputes in the sector. Compared to the 43% of respondents who expressed a preference for arbitration, only 15% chose court litigation as their most favoured option. However, at present, litigation remains the most used mechanism in practice, used in relation to 44% of TMT disputes over the last five years. In that regard, the authors of the survey add that many of these disputes arise from contracts which were concluded long before arbitration grew in popularity and consequently, they do not include an arbitration clause. If this is true, we are likely to witness a significant increase in the number of TMT arbitrations. Indeed, 82% of respondents believed that there was likely to be a general increase in TMT arbitrations.

In general, the survey suggests that TMT companies may require more confidence in international arbitration in order to make this theoretical preference a reality. One way in which this could be addressed is by increasing the number of arbitrators with specialist knowledge of the sector and the specific issues in dispute. This approach appears to correspond with the views of the respondents to the Queen Mary University of London survey, which identified the technical expertise of the decision maker as an important aspect when deciding on a dispute resolution mechanism, as well as decision makers. In light of this conclusion, it was a logical step for CPR, which already has a series of specialist panels in other areas, to appoint a specialised Cyber Panel which may appeal to parties faced with disputes relating from data security breaches. More generally, there seems to be a wide consensus that cybersecurity-related arbitration is going to be an area of future growth.

]]>https://www.hlarbitrationlaw.com/2017/08/cpr-appoints-new-cyber-panel-ahead-of-anticipated-increase-in-data-security-disputes/feed/0ICC opens in the Abu Dhabi Global Markethttps://www.hlarbitrationlaw.com/2017/08/icc-opens-in-the-abu-dhabi-global-market/
https://www.hlarbitrationlaw.com/2017/08/icc-opens-in-the-abu-dhabi-global-market/#respondWed, 16 Aug 2017 10:15:22 +0000http://www.hlarbitrationlaw.com/?p=1729The International Chamber of Commerce (“ICC“) has announced that it will open a new arbitration centre in the Abu Dhabi Global Market (“ADGM“), Abu Dhabi’s financial freezone located in the Al Maryah Island, which began operating in 2014. The centre will be known as the ADGM Arbitration Centre and is expected to open for business in January 2018.

The ICC is a reputable and leading international arbitral institution with its headquarters in Paris. The ADGM Arbitration Centre will be the ICC’s third representative office worldwide – joining Shanghai and Sao Paolo – in addition to the ICC’s case management offices in Hong Kong and New York. Notably, this will be the ICC’s first office in the Middle East and is a reflection of the increasing recourse to international arbitration in the region.

The opening of the ADGM Arbitration Centre will likely compete with the DIFC-LCIA, the offshore arbitration centre established in Abu Dhabi’s neighbouring Emirate of Dubai as well as “onshore” institutions such as the ADCCAC and the DIAC. However, it remains to be seen whether the ADGM Arbitration Centre will become a popular choice for arbitration. The question of enforcement of arbitral awards will likely play an important role in that regard, though the choice of the seat is the more relevant factor for enforcement. It will also be interesting to see if Abu Dhabi state-owned entities opt to choose the ADGM Arbitration Centre for their dispute resolution clauses in contracts which otherwise have no nexus to the ADGM.

We outline below some of the key characteristics of the ADGM:

Arbitration Regulations

The ADGM’s Arbitration Regulations 2015 are modelled on the UNCITRAL Model Law (“Model Law“), which is internationally recognised and widely used by many States as the basis of their own arbitration law.

​There are some departures from the Model Law to account for regional considerations, which will likely make it an even more attractive forum for resolving disputes in the region. These include:

Confidentiality and privacy: There is limited scope for the disclosure of the existence of arbitration proceedings and the award. There is a requirement that court proceedings related to arbitration be held in closed court; and

Challenging enforcement of awards: Parties can agree in advance to dispense of or limit their right to bring an action to set aside an arbitral award, making the award final and not subject to any appeal, thereby reducing the involvement of the courts. However, if a party seeks to enforce the award in the ADGM Courts, the other party could still challenge the validity of the award based upon the grounds specified in the ADGM’s Arbitration Regulations 2015.

English common law

The ADGM directly adopts English common law (including the principles of equity), as well as a defined list of certain statutes in force in England by reference. It is important to note that not all English statutes apply as ADGM law – only those which have been expressly adopted.

The English Arbitration Act 1996 has not been adopted and does not apply. Instead, the ADGM Arbitration Regulations 2015 referred to above are applicable.

The ADGM has its own Court Procedure Rules (“CPR“) and Regulations. The CPR deals with applications to the court, including applications for the enforcement of an arbitral award.

This announcement, combined with the anticipated enactment of a new federal arbitration law in the UAE later this year, is a welcome development to the UAE’s arbitration scene and is in line with the region’s efforts to become more arbitration friendly.

]]>https://www.hlarbitrationlaw.com/2017/08/icc-opens-in-the-abu-dhabi-global-market/feed/0Hong Kong court appoints receivers to preserve assets in aid of arbitral proceedings in Chinahttps://www.hlarbitrationlaw.com/2017/07/hong-kong-court-appoints-receivers-to-preserve-assets-in-aid-of-arbitral-proceedings-in-china/
https://www.hlarbitrationlaw.com/2017/07/hong-kong-court-appoints-receivers-to-preserve-assets-in-aid-of-arbitral-proceedings-in-china/#respondTue, 25 Jul 2017 10:47:41 +0000http://www.hlarbitrationlaw.com/?p=1726The Hong Kong High Court has appointed receivers over shares in a Hong Kong company as an interim measure to preserve the status quo and the value of the shares, pending the outcome of CIETAC arbitration proceedings in mainland China.

The decision provides useful guidance on how parties can seek interim relief in aid of foreign arbitral proceedings, particularly in Mainland China or other jurisdictions that do not have comprehensive provisions for granting interim relief to preserve of assets pending the outcome of arbitral proceedings.

In particular, the judge noted that the appointment of receivers in this case was not the draconian measure that it was argued to be, as the shares being placed in receivership were shares in an asset holding company (as opposed to an active business where receiver and managers would be required) and accordingly, there would be minimal adverse effect on any business operations.

Given the many businesses operating in China that are under or related to a holding company in Hong Kong, this is a welcome decision for parties engaged in, or considering arbitration proceedings in the mainland.

Background

The case relates to a protracted series of disputes over shares held in China Shanshui Investment Company Limited (“CSI“), which owns a large number of shares in a Hong Kong listed company.

The current case before the Hong Kong court was for interim measures in aid of CIETAC arbitration proceedings in Beijing over ownership of a particular portion of the CSI shares (the “Shares“). The dispute concerned the validity and enforceability of a Pledge Agreement governed by PRC law whereby the Defendants had purported to pledge the Shares to the applicant as security. The applicant alleged that in breach of the Pledge Agreement, the Defendants had not only exercised their voting rights in respect of the Shares without the knowledge of the applicant, but had sold and transferred the Shares to a third party under share purchase agreements (“SPAs“). The applicant sought, inter alia, an order to appoint receivers in respect of Shares.

The Defendants’ argument that the PRC court or the arbitral tribunal was the proper forum for the grant of any relief was rejected by the Hong Kong court. While it was appreciated that a Mainland court, as the supervisory court of the CIETAC arbitration, would be in the best position to decide questions as to the validity and enforceability of the Pledge Agreement governed by PRC law, it did not follow that a Hong Kong court should not exercise its powers under s.45 to grant a form of interim measure which is appropriate and necessary, to facilitate the arbitral tribunal or the Mainland court which has the primary jurisdiction over the CIETAC arbitration.

The court held that under s.45 of the Arbitration Ordinance, the Hong Kong courts have both power and jurisdiction to grant interim measures to facilitate the process of a court or arbitral tribunal commenced outside of Hong Kong. In fact, s.45 envisaged that there be a (non-Hong Kong) court with primary jurisdiction over the arbitral proceedings, in this case the PRC court, as the supervisory court over the arbitration. The Hong Kong court may, however, decline to grant the measure if it considers it “more appropriate” for the interim measure sought to be dealt with by the arbitral tribunal.

The status quo

The court discussed what constituted the status quo. The Defendants had started to exercise their voting rights in the Shares in January 2017. The CIETAC arbitration was commenced in February 2017, by which the applicant complained of breaches of the Pledge Agreement. The Defendants entered into the SPAs to transfer the Shares to a third party in March 2017. Here, the status quo was prior to the SPAs and prior to the Defendants’ execution of the transfers of the Shares in favour of a third party. The Court considered the position existing immediately before the commencement of arbitration as the status quo.

The receivership order

It was agreed that under PRC law, there is no concept of a receiver taking over the shares other than in a bankruptcy, and there is doubt as to whether any order for asset preservation that may be made by the Mainland courts can extend to assets which are in Hong Kong. Nevertheless, the Ordinance is clear that the court may exercise its powers to grant interim measures irrespective of whether or not similar powers may be exercised by an arbitral tribunal.

The court then considered the question of whether a receivership order is a type of measure which the court has power to grant in relation to arbitral proceedings in Hong Kong and whether on the facts of this case, such a receivership order should be made, bearing in mind the established principles for the grant of a receivership.

The court found that the power to appoint receivers was founded under s.21L High Court Ordinance and is a discretionary power to be exercised flexibly on a similar basis to that of an interlocutory injunction, to which the principles in American Cyanamid apply. On the facts, the court found that there was a serious question to be tried and that there was a risk that the assets would be dissipated.

In terms of the balance of convenience, the principle that the court should adopt is the course which is likely to cause the lower risk of injustice, if it should turn out that the interim order (whether to grant or refuse the relief) is wrong. Given that there were competing claims as to the ownership of the Shares, and each side claimed irreversible and irreparable harm should they not be permitted to exercise rights in the Shares, the appointment of a receiver to “hold the ring” in the interim of the making of an award in the arbitration, should cause the lower risk of injustice to either side.

Relevance

Section 45 of the Arbitration Ordinance makes it clear that Hong Kong courts have the power to grant interim relief in aid of foreign arbitral proceedings.

This is another arbitration friendly decision by the Hong Kong courts which granted interim measures in order to facilitate the process of the CIETAC arbitral tribunal or the Mainland court which has primary jurisdiction over the arbitration.

For parties who have commenced arbitral proceedings in jurisdictions without a comprehensive legal regime for granting interim relief, the provision can be a helpful tool for parties to seek the appointment of receivers, injunctive relief or to restore the status quo of parties pending the decision of the foreign arbitral proceedings. This would be of particular relevance for parties who wish to preserve assets held in Hong Kong, but with pending arbitration in the Mainland China or foreign jurisdictions.

]]>https://www.hlarbitrationlaw.com/2017/07/hong-kong-court-appoints-receivers-to-preserve-assets-in-aid-of-arbitral-proceedings-in-china/feed/0Updates to Hong Kong Arbitration Ordinance: third party funding and arbitration over IP rightshttps://www.hlarbitrationlaw.com/2017/06/updates-to-hong-kong-arbitration-ordinance-third-party-funding-and-arbitration-over-ip-rights/
https://www.hlarbitrationlaw.com/2017/06/updates-to-hong-kong-arbitration-ordinance-third-party-funding-and-arbitration-over-ip-rights/#respondMon, 26 Jun 2017 13:51:06 +0000http://www.hlarbitrationlaw.com/?p=1722On Wednesday, 14 June 2017, two sets of amendments to Hong Kong’s arbitration law were passed to clarify that:

third party funding of arbitration, mediation and related proceedings is permitted under Hong Kong law, and

disputes over intellectual property rights (“IPRs“) can be resolved through confidential arbitration and that it is not contrary to the public policy of Hong Kong to enforce arbitral awards involving IPRs.

Third party funding

The Third Party Funding Bill amends the Arbitration Ordinance and the Mediation Ordinance to make clear that third party funding of arbitration, mediation and related proceedings is permitted under Hong Kong law.

It is now clear that the centuries-old doctrines of maintenance and champerty, which still prohibit third party funding for litigation, do not apply to funding of arbitration and mediation.

The Third Party Funding Bill also provides measures and safeguards aimed at preserving integrity if third party funding is used, including providing for a code of practice for funders (which is still to be developed after completion of a consultation process, which is already underway).

The amendments are expected come into effect later this year, to allow time for the code of practice to be drawn up.

The Third Party Funding Bill closely follows the recommendations made by the Law Reform Commission in the Reporton Third Party Funding for Arbitration dated 12 October 2016, save for an amendment that allows third party funding by lawyers and law firms so long as they do not act for any party in the relevant proceedings. (See our earlier note setting out the key points of the Bill here.)

The availability of third party funding is a welcome development for arbitrations seated in Hong Kong, bringing it in line with international developments. It will allow greater access to justice and provide another option for companies to manage financial risk.

Arbitration of disputes involving IPRs

The IPR Arbitration Bill amends the Arbitration Ordinance to clarify that disputes involving IPRs can be resolved through arbitration under Hong Kong law and that it is not contrary to the public policy of Hong Kong to enforce arbitral awards involving IPRs.

The changes are expected to come into effect on 1 January 2018, following a period of around six months to allow practitioners and others concerned to prepare for commencement of the relevant amendments after yesterday’s passage of the Bill.

The current arbitration law is silent as to the subject matters of disputes that are capable of resolution by arbitration and a clear statement concerning the arbitrability of disputes involving IPRs has been lacking.

Under the IPR Arbitration Bill, arbitration proceedings over IPRs will remain confidential and any awards will only have inter partes effect. Legal rights of third parties not a party to the arbitration proceedings will not be affected and there will be no requirement for disclosure to or recordal of arbitral awards involving IPRs with the respective Registries of the Hong Kong Intellectual Property Department. In fact, none of the IP related legislation has been amended to make such awards a recordable instrument or event affecting rights in or under a registered IPR / an application for registration.

While expressly providing for arbitration of disputes involving IPRs is a positive step for Hong Kong as an international centre for arbitration, arbitration of disputes involving IPRs is a complex area. Parties considering arbitration of disputes involving IPRs should seek legal advice about the implications of agreeing to arbitrate, particularly in a cross-border context.

]]>https://www.hlarbitrationlaw.com/2017/06/updates-to-hong-kong-arbitration-ordinance-third-party-funding-and-arbitration-over-ip-rights/feed/0Somewhere beyond the seen: Paris Court of Appeal sets aside an award on the basis of serious indications of money laundering after considering new evidence and reevaluating the record.https://www.hlarbitrationlaw.com/2017/06/somewhere-beyond-the-seen-paris-court-of-appeal-sets-aside-an-award-on-the-basis-of-serious-indications-of-money-laundering-after-considering-new-evidence-and-reevaluating-the-record/
https://www.hlarbitrationlaw.com/2017/06/somewhere-beyond-the-seen-paris-court-of-appeal-sets-aside-an-award-on-the-basis-of-serious-indications-of-money-laundering-after-considering-new-evidence-and-reevaluating-the-record/#respondThu, 08 Jun 2017 13:08:17 +0000http://www.hlarbitrationlaw.com/?p=1718Abstract:

On 21 February 2017, the Paris Court of Appeal set aside an UNCITRAL award on international public policy grounds due to serious indications of money laundering. Allegations of corruption and criminal activity have been used increasingly in recent years in French courts to argue for the setting aside of arbitral awards on the grounds of a breach of international public policy. This is the first time, however, that the Paris Court of Appeal has set aside an award on the basis of alleged money laundering. Further, this decision appears to specify the extent of review that French courts may perform when dealing with allegations of a breach of international public policy in cases where issues of money laundering are at stake, as it follows a detailed review of facts that were put before the arbitral tribunal and the consideration of new evidence.

Relevant facts:

Mr Belokon, a Latvian citizen, acquired Insan Bank in Kyrgyzstan in 2007 and renamed it Manas Bank. In spring 2010, political tensions in Kyrgyzstan led to the fall of President Bakiev and the Kyrgyz authorities placed Manas Bank into temporary administration. The initial temporary administration period was extended several times. On 2 August 2011, Mr Belokon commenced UNCITRAL arbitration proceedings under article 9.2(d) of the Kyrgyzstan-Latvia BIT, alleging that the continuing extension of the temporary administration period amounted to indirect expropriation.

In an award rendered on 24 October 2014, the three-member tribunal found in favour of Mr. Belokon and ordered Kyrgyzstan to pay $15.2 million. An action to set aside the award was brought by the Kyrgyz Republic before the Paris Court of Appeal in January 2015, notably on the grounds that the recognition or enforcement of an award in contradiction with the fight against money laundering would constitute a breach of international public policy.

In its application to have the award set aside, the Kyrgyz Republic argued (as it had during the arbitration proceedings) that most of Manas Bank’s activities had the purpose of furthering money laundering. As evidence, it relied on the fact that the bank’s 17 main clients were offshore companies whose operations were devoid of any economic purpose and that Mr Belokon was very closely connected to the former president’s son. It also adduced new evidence that Baltic International Bank, also owned by Mr Belokon, was fined 1.1 million euros in March 2016, more than a year after the award was rendered, for breaching anti money-laundering rules in Latvia between 2003 and 2015.

In seeking dismissal of the application, Mr Belokon claimed that Kyrgyzstan’s application to set the award aside amounted to a review of the merits of the case, which he argued was not permitted under French law.

Decision:

The Paris Court of Appeal set aside the award on the basis that its recognition or enforcement would be contrary to international public policy. Interestingly, it disagreed with the tribunal’s finding that there was insufficient clear evidence to support serious indications of money laundering. Explaining its decision, the Court said that its task was to determine whether recognition or enforcement of the award would undermine the fight against money laundering by allowing a party to benefit from criminal activities. In carrying out this assessment, the Court said that it was not limited to the evidence available to the tribunal or bound by its assessment of the record, although it added that due process must always be respected.

Comment:

This decision constitutes the first example of an award being set aside by the French courts on international public policy grounds on the basis of alleged money laundering. In coming to this decision, the Paris Court of Appeal appears to have conducted a relatively thorough review by examining in detail evidence that was put before the tribunal and considering new evidence, such as the 1.1 million euro fine given to Baltic International Bank for breaching anti money-laundering rules in Latvia. This extent of review appears to share similarities with the reasoning in three 2014 Paris Court of Appeal decisions in the area of corruption (Gulf Leaders, République du Congo v. Commisimpex and SAS Man Diesel), the first two of which have been upheld by the Cour de cassation (French Supreme Court). It also appears to be in contrast with the 2004 Paris Court of Appeal decision in Thalès, an important case in this area, according to which national courts should not carry out a thorough review of matters dealt with by the arbitral tribunal and that only a flagrant, effective and concrete breach of international public policy could lead to an award being set aside.

there is a possibility that China is opening the door to ad hoc arbitration.

These changes, issued on 30 December 2016 in the Opinions on Provision of Judicial Safeguards to the Development of Pilot Free Trade Zones (Fa Fa [2016] No. 34) (“Opinions“), are major pro-arbitration changes to promote business in China’s free trade zones.

Development of the “foreign element” rule

Under the PRC law, a contract is foreign-related only if the contract contains a “foreign element” in at least one of the following aspects: nationality of the parties, habitual residence of the parties, subject matter of the contract, legal facts leading to establishment, change or termination of the contract, as well as other circumstances which a people’s court may deem as a “foreign element”.

The importance of the “foreign element” rule under the PRC law is indicated in the choice of the seat of arbitration, given that a dispute in connection with a contract without a “foreign element” may not be submitted to arbitration seated in a foreign jurisdiction. (See the SPC’s Reply in Zhaolai Xinsheng [2013] Min Si Ta Zi No. 64.)

Change happened in the case of Siemens v. Golden Landmark ([2013] Hu Yi Zhong Min Ren [Wai Zhong] Zi No.2), whereby the No. 1 Intermediate People’s Court of Shanghai Municipality innovatively upheld the “foreign element” in a contract based on, inter alia, the fact that the parties of the contract are two wholly foreign owned enterprises (“WFOE“) incorporated in the Shanghai Pilot Free Trade Zone, even though the conventional thinking is that a WFOE in itself does not constitute a “foreign element”. Nonetheless, given that PRC court judgments do not have binding effect on other PRC courts, it was not clear at the time whether other PRC courts would adopt a similar approach.

With the promulgation of the Opinions in December 2016, Article 9 of the Opinions clarified that an “arbitration agreement concluded between WFOEs incorporated in a pilot free trade zone submitting a commercial dispute to foreign arbitration should not be held as invalid solely based on lack of foreign element of the dispute“, thereby confirming the interpretation in Siemens v. Golden Landmark in the form of a judicial document.

Ad hoc arbitration in China possible

Under the PRC Arbitration Law, a designated arbitration commission is one of the mandatory requirements for a valid arbitration agreement. As a result, ad hoc arbitration is not permitted in China.

The Opinions in Article 9 provide that an “arbitration agreement between companies incorporated in a pilot free trade zone submitting a relevant dispute to arbitration conducted at a specific place in the mainland, through specific arbitration rules, and by specific personnel may be held as valid.” Given that the designated arbitration commission is not required under this article, there are certain voices in the Chinese arbitration community suggesting that such article may be interpreted as China’s attempt to open the door to ad hoc arbitration.

Nonetheless, given that Article 9 does not go into details for some issues such as the scope of the “specific arbitration rules” as well as the potential conflict between Article 9 and the mandatory requirement regarding designated arbitration commission under the PRC Arbitration Law, clarification may be needed for future application of Article 9, and its impact on ad hoc arbitration in China still remains to be seen.